The Contradictions In the Clinton Health Plan

924 I I January 12,1993 THE CONTRADICITONS IN THE CIJNTON
HEALTlMLAN INTRODUCTION I' The most obvious defect of the current
Clinton proposal is that it tries to combine in one measure two
completely contradictgr strategies for reforming the health system.
On the one hand it incorporates all the bureaucratic appa ratus of
rigid national budgets sweeping price controls, and powerful boards
to determine what medical care Americans will receive. But on the
other hand, it also incorporates features of a strategy based on
consumer choice and competition.

Specifically, the Clinton proposal would d Establish a fixed
national health budget, developed by a National Health Board d
Establish local managed care networks, which would receive a fee to
provide medical services. Providers outside these networks woul d
be subject to price controls and budget limits d Requlre all
employers elther to provide coverage to thelr employees or to
enroll their employees in a managed care network. Unemployed
Americans and Medicaid recipients could join a network, with the
gover n ment paying part or all of the pmium d Require all insurers
to offer a comprehenslve set of health services, determined by the
National Health Board, and to charge enrollees a premium without re
gard to health risk. Insurers could no longer deny coverage to
anyone.

Other praposals, including a bill developed by the Conservative
Democratic Faun in the House, would include versions of the Clinton
consumer choice strategy but do not in clude his provisions for
fixed budgets and price controls. These generally are known as
managed competition proposals that will not mix, there are many
other flaws. Among them While the entire Clinton plan suffers from
the oil-and-water problem of two strategies For a fixed national
budget to mean anything, it must incarparate e xplicit ra tioning,
which is inefficient yd rejected by the vast majority of Americans
by margins of nearly four to one. Otherwise it is nothing more than
a spending target and will succeed only if other cost controls
work. Unfortunately for Clinton, Amer i cas experience with health
cm price controls and entitlement programs suggests the national
budget will be meaningless 3 For example, a recent EBRUGallup swey,
completed in October 1992, found only 20 percent of Americans
prepared to accept limits on the h ealth care available to the
average penon. See John Immmahr, Rarioning Healrh Cure: A Pvbfic
Perspecfive, paper presented December 1,1992, at a forum sponsored
by the Employee Benefit Research Institute in Washimgton, D.C 2
Establishing a standard benefit s package for Americans will
encourage heavy lobbying by medical specialties to be included,
much as they have lobbied suc cessfully at the state level to be
included in mandated benefits laws. The likely result: a steady
increase in the cost of the basic p ackage Place of employment
would continue to be the primary determinant of the health caxe
available to each family. Changing jobs often would mean chang ing
plans and doctors By not significantly reforming the tax treatment
of health care, the Clinton pr oposal locks in many of the perverse
incentives and inequities of the current tax code.

Consumer choice and competition should be at the heart of any
structural reform of Americas health care system, as Clinton has
suggested. But that means rejecting the r em nants of health care
central planning contained in the Clinton proposal. Instead it
means enacting a major reform of the tax code to give Americans the
incentive and the means to choose the plan that is best for them
within a framework of wide choice a n d strong com petition. With
that reform in place, America could achieve the illusive goal of
affordable access to quality care for all its citizens WHY
AMERICANS WANT HEALTH CARE REFORM Dissatisfaction with the health
care system is higher in the United S tates than in any othermajor
industrialized country. Polls routinely show that well over 80
percent of Americans want the system completely rebuilt or feel it
needs fundamental change.

By comparison, less than 50 percent of Canadians or Germans
believe tha t such a level of change is necessary in their systems
means that Americans want big changes in the way that they
themselves receive health care. A 1992 national survey, for
instance, found only 26 percent wem ssatisfied with the health care
services thei r family received during the last few years. What
concerns Americans most is that their employer-pvided to them of
medical care will became prohibitive.

There is a good reason why families are anxious, even if they
currently have good in surance and are re ceiving excellent care.
That is because for working Americans, health care benefits
invariably are tied to the place of work. Not only are there
historical rea sons for this, but because the tax code treats
health care benefits as tax-free income if they a re supplied by an
employer as part of a workers compensation, there are also strong
incentives for health care to be provided in this way Politicians
should be wary, however, of assuming that this high level of
dissatisfaction P nefits will be cut back, o r that the cost Be 4 5
6 Ibid Robert J. Blendon and Karen Donelan, me Public and the Emmg
Debate Over National Health Immw The New England Jowd ofMedicine,
323, July 19,1990, pp. 208-212.

The 1992 KaiWComrnonwealth Health Insurance Survey 3 This
tax-prefer red employment-based system leads directly to the
characteristics of U.S. health care that cause so much concern?
Among these A lack of portability. With health benefits tied to the
place of work, moving jobs or being laid off can mean the loss of
benefit s , or at the very least having to join a different health
plan, often with various restrictions on pre-existing conditions
and other limits. One result of this is "job lock," the phenomenon
where workers feel unable to take a better job for fear of losing
coverage.

Some 30 percent of Americans say a member of their household has
experi enced this8 A high level of uninsurance. With tax advantages
effectively restricted to em ployer-sponsored group coverage,
workers without a company plan often find purchasin g their own
health insurance prohibitively expensive. This is why about
three-quarters of the uninsured are workers or their dependents.
This problem is compounded by the underwriting and renewal
practices of insm which makes coverage virtually unobtainab l e for
families with a poor health recordg Rapid cost escalation. Even
though company-provided benefits actually are part of a worker's
gross compensation-not "paid for" by employers-work en tend to
think of benefits as 'W or involving little direct cost t o them
selves. Mareover, the group underwriting of employment-based health
insur ance means that individual employees do not typically face
higher costs (other than, possibly, copayments) because of their
own usage of services. As a re sult, thm is usually little or no
incentive far workers to limit their consump tion of unnecessary
care, or to seek the best value for money. This is the main reason
why health care costs are increasing at several times the general
rate of inflation To be sure, there are othe r features of the U.S.
health care system that contribute to the dissatisfaction and
financial whes of Americans. Among these are excessive insurance
paperwork (often encouraged by employers to slow down the volume of
claims and the various effects of larg e malpractice settlements
(such as the lack of certain specialties in some areas But the core
of the problem is its employment-based design 7 8 9 Far a fuller
description of the design of the current system and its
consequences, see Stuart M. Butler A Poli cy Maker's Guide to the
Health Care Crisis. Part I Heritage Foundation Talking Points,
March 5,1992 1991 New Yarlt Times-CBS poll cited by Paul Starr,
Thebgic qfHeufth-Cme Rcfom (Knoxville,Tenn whit Direct Books, 1992
p. 21.

See Edmund F. Haislmaiex A Poli cy Maker's Guide to the Health
Care Crisis, Part IIk What's Wrong with America's Health Insurance
Market Heritage Foundation Talkbig Points, October 1,1992 4 THE
CLINTON PLAN The Clinton transition team currently is developing a
full proposal, expected to be sent to Congress early in the new
Administration. But President-elect Clinton did spell out the broad
outlines of his pferred approach during the campaign. The plan aims
to limit health cost increases to the same growth rate as wages, to
guarantee affo r dable, quality coverage for all Americans, and yet
to preserve personal choice of doctor and hospital low the Plan Is
Meant to Work Controlling Costs d The plan would establish a
national health budget, covering total private as well as public
expenditure s . This figure would be developed by a Natlonal Health
Board consisting of Iepmentatives from the public, providers, busi
ness, labor, and government The national budget would be broken
down into global budgets for states and possibly networks of
hospitals and doctors d Within this budget limit, most Americans
would have access to a choice of local managed care networks. These
organized systems of insurers, hospitals and doctors would receive
a fmed amount of money from employers or the government, known as a
capitation fee, for supplying an enrollee's full medi cal senrices.
The fee would be set by each state, to meet its share of the na
tional budget d Other ~mericans, at the discretion of their
employers, would be enrolled in company-sponsored health insu r
ance plans. For such services provided out si& the managed care
networks, states would introduce fee schedules for doctars and
hospitals carresponding to the global budget d Medicare would be
subject to a budget limit and to existing physician and hospita l
fee schedules d Certain tax breaks would be eliminawd for
pharmaceutical companies that raised their drug prices faster than
the rate of inflation 1) Universal Coverage d All employers would
be required to provide coverage to their employees and families ,
either directly from insurers or through the managed ca~e
networks.

Employees would be required to shoulder a partion of the cost.
Small em ployers would receive tax credits to help offset the cost
of the mandate d The health insurance deduction for the
self-employed would be raised to 100 percent of coverage cost, up
from today's 25 percent d Insurers would face new requirements.
They would have to offer a com prehensive health benefits package,
determined by the National Health Board. They would no lon g er be
able to exclude any family from enrolling 5 in their plan, whatever
their health recd Insurers would also be required to charge
COmmUnity rates, which means premiums to be set regionally, with
out regard to the insurance risk posed by an employee or group of
employ ees, or to administrative factors (such as the size of an
enrolled work farce).

And insurers also would have to introduce a single, standardized
claim form package, and to establishing general standards for
pricing and service infomation m uch like the Securities and
Exchange Commission oversees the financial d The government would
band together small businesses and individuals into
publicly-sponsored purchasing groups. Health networks would then
have to compete for the business of each ind i vidual or business.
This feature of the Clinton plan is generally known as managed
competition 10 Alain Enthoven and Richard Kronick, A Consumer
Choice plan far the 1990s. The New England Jowd of Medicine, 320,
Janua~y 5,1989, pp 29-37 and 320, January 12 , 1989, pp. 94-101 11
See Jeremy Rosna, A prosresSive Plan for Affordable. Universal
Health Care. in Will Marshall and Martin Schmnm, eds Manaiate for
Change (New York: Berkley Books, 1992 6 The main features of the
CDF bill are refinements of the same mana g ed competi tion
approach used in the Clinton plan. Among the specific provisions of
the CDF bill: d Tax and regulatory incentives would be given for
health care providers and insurance companies to form networks
known as Accountable Health Plans AHPs Thes e plans would have to
offer a standard, federally determined plan-although they could
also market more elaborate plans. As in the Clinton proposal AHPs
would have to price their product using a form of community rating,
with variations in premiums based on l y on geographic location and
to a limited degree based on age. Plans would have to enroll
individuals regardless of medical condition d Currently an employer
may deduct from taxable income the full cost (with out limit) of
health benefits included in an e mployees compensation.

Workers may exclude the value (again, without limit of those
benefits from their taxable income. More modest tax breaks are
available for the self-employed and those experiencing high
out-of-pocket medical costs Under the CDF bill, t he employers tax
deduction would be limited to the cost of the lowest-priced AHP in
the area. The extra cost of more elaborate plans provided by the
employer would be added to the fms taxable in come. Individuals who
pay all or part of the premiums of an AHP plan would be able to
deduct the full amount. Individuals or firms purchasing non-AHP
plans would receive no tax breaks. In the Clinton proposal, there
is no discussion of tax changes.

State-chartered not-for-profit Health Plan Purchaslng
Cooperatlves HPPCs) would be established These would have the
exclusive right in a region to organize a set of Accountable Health
Plans. Businesses with fewer than 1,OOO employees would have to
join a HPPC. At the states dis cretion, larger firms might
effectively for m their own HPPC. HPPCs would collect all premiums
from individuals or firms and make payments to health plans
according to the health risk of each plans enrollees d Medicaid
would be replaced with a new federal program to enable all fami
lies with incomes below 200 percent of the state% poverty level to
obtain coverage through a HPPC. Families with incomes between 100
percent and 200 percent of poverty would pay premiums according to
a sliding scale, based on income. The states would be relieved of
the bur den of acute medical caxe, but would have to take over
responsibility for long-term cm.

I I 12 Undated description of H.R. 5936 released by the
Conservative Democratic Forum 7 PROBLEMS WITH THE CLINTON PLAN The
Clinton proposal undoubtedly served the purpo ses of an election
campaign, fof it contained elements from the major competing plans
espoused by different factions of the Democratic coalition. But
that is the central flaw in the proposal. It would mean a na tional
health care system combining two cont r adictory sfrategies-central
planning with price controls, and consumer choice with competition.
Rather than combining the best of each strategy, it would in
reality mean the worst of each. If enacted, it is destined to col
lapse in chaos as competing heal t h care providers seek to evade
price controls and shift their costs to less regulated sectors,
government bureaucracies expand to try to stop eva sion, and
consumers grumble at the red tape and rationing while exploiting
every loop hole in the regulations .

But the proposal does not merely suffer from this
self-destroying internal contradic tion. Its core elements have
their own serious weaknesses Yhy Global Budgets With Price Controls
Cannot Work in the U.S.

Many Americans find the idea of a national health care budget
very appealing. Why not simply establish some total amount the
country will spend on health cm, and then distribute these
resou~ces efficiently and fairly? If it were that simple, there
would b e good reason to apply the same approach to every other
sector of the economy. A global budget for housing, perhaps, and
one for automobiles. By simply declaring such budgets and enfming
them, Americans presumably could end inflation in every sector,
impro ve efficiency, and have billions of dollars in savings to
spend on extra goods and services. It sounds too good to be
true.

It is, of course. The central problem with such an idea is in a
sense semantic: either a national budget means something or it does
not Optlon 1: A Meaningful Budget. If a national budget really
means something then it means Americans as a whole, by law, can
spend only a certain amount on their health care.

Once that figure is reached, say on December 12th in a
particular year, health care ser vices must cease, hospital doors
must be closed and doctors offices shut down. To be sure,
well-managed hospitals and prudent doctors can spread their
resources cmfully over a whole year, as they try to do in Canada,
so that there is no end-of-y ear shut down. But even that will
happen only if each hospital or pup of providers has its own
government-mandated budget, which means another extensive layer of
bureaucracy.

Otherwise each hospital or doctor has the incentive to maximize
earnings without re gard to any national or state budget. If every
provider is, in a sense, cutting a slice from a limited pie, none
has the incentive to cut a small slice so that someone else can cut
a larger one Setting a global budget for any part of the health
care sy s tem also begs a question what counts as health spending?
If a hospitals budget is controlled, how does the gov ernment deal
with the explosion of spending that no doubt would occur in
substitutes for hospitals, such as clinics, skilled nursing homes,
and e ven doctors offices. A bud get might be set for prescription
drugs, but what about non-prescription medications such as
antihistamines, cough syrup, or aspirin? Every attempt to clamp
down on one 8 definition simply would mean an increase in spending
some whext else less subject to control.

But for lawmakers, the biggest problem is that for a global
budget to mean any thing, it must involve denying some Americans
health care they are willing and able to pay fbr-in other words, to
ration care. While the citi zens of some countries grudg ingly
accept explicit rationing, surveys of public opinion in the U.S.
suggest that Con gress and the new Clinton Administration risk an
enormous backlash if they enact a rationing system. 13 Moreover,
attempts to mitigate the aspects of rationing that would most
offend Americans and humane in Canada and Britain because the
particulars of the rationing system far the most part are carried
out by physicians. With his or her eye on the budget, it is the
doctor who makes case-by-c a se decisions that match course of
treatment with avail able funds. This works tolerably well because
patients are far more inclined to accept rationing by their doctor
than by some faceless official in the department of health and
unlike the official, the doctor can take into account the many
unique and subjec tive feams of an individual patient.

This leads some advocates of rationing in the U.S. to call for
the rationing decision to be made as close as possible to the
patient, ideally by the doctor.To be sure, that would fit in with
the attitudes of most Americans. Most Americans strongly oppose ra
tioning. But when asked who should make rationing decisions if that
were the law they overwhelmingly want their own doctor or local
doctors to do ~0 Government officials come well down the list of
prefextnces.

But it is diffkult to see how such a localized rationing system
could function in the U.S. without a sweeping overhaul of the
malpractice laws. In Canada or Britain a pa tient may be angry when
a doctor re fuses care, but he must accept it. In America the
patient hires an attorney and sues when he does not like the
doctors decision. Yet Congress shows little inclination to confront
the powerful trial lawyers lobby and pro vide health practitioners
with the type of immunity enjoyed by Canadian or British
doctars.

At the other extreme, other advocates of rationing-including, it
appears, President elect Clinton-would entrust detailed guidelines
over what health ca~e Americans will or will not receive to some in
dependent national board, a kind of Supreme Court of Health. Such a
board supposedly would be immune hm public pressm, much like the
Federal Reserve Board or the U.S. Supreme Court, and its edicts
would carry the farce of law. Not suxprisingly, rationing b y an
independent board is among the least preferred options of an
American public which is in any case overwhelmingly opposed to
rationing. And even if such a board were beyond the political reach
of pa tients angry at its decisions, the creators of the b o
ard-Members of Congress-would not be not likely to succeed. For
example, rationing is made more palatable 13 Seefwtnote3 14
EBRWallup Poll, cited in Immerwahr, Rutioning Healfh Cure 9 Option
2: A Meaningless Budget. But a national budget may in practice b e
devoid of any real meaning other than a hoped-fur outcome. In other
words, it may be like any entitle ment budget within the federal
budget-not a limit on spending but merely the pro jected spending
outcome of other policies. In this case, for Mr Clinton s national
health budget to grow no faster than the increase in wages (which
averaged 6.2 per cent during 1980-1991, compared with a health care
expenditure growth averaging 10.3 percent during the period), as he
desires, his other cost control measms must prove far mm effective
than any strategy currently used widely in the public or private
sectors.

The private sectors smnuous efforts at cost control, for
instance, still resulted in an average annual premium increase of
14.4 percent between 1980 and 1991, compared with an average rise
in the Consumer Price Index of 4.7 percent. And in addition, per
capita s ending on health care grew during the period at an average
annual rate of 9.3 percen$ Even the successful Federal Employee
Health Benefits Program (FE H BP the nearest existing model to a
functioning managed competition system, could only keep the average
annual increase in premium costs down to 10.8 percent during the
period. And with over five times as many bureaucrats, and 30 times
as many pages of reg ulations, as the FEHBP per covered enrollee,
Medicare costs still swelled at an an nual rate of 9.7 percent.

Medicares experience with price controls should give cold
comfort to Clinton aides who see price controls as the key to
achieving a global budget. Medicares attempt in the 1980s to hold
down costs with standard fees for each treatment quickly led to an
explosion of Medicate physician costs, as hospitals shifted costs
to evade controls.

Moreover, hospitals which played by the rules lost money, while
those that gamed the price controls prospered. Attempts to limit
physician costs through government fiat have had similar results.
Many conscientious doctors have found their inwmes falling while
others maximized their incomes by such tactics as sharter a n d
more frequent of fice visits for patientslpd by routinely using
procedures and diagnoses that yield high reimbursements Voblems
wlth Managed Competition Managed competition proposals tend to
differ according to where they place the em phasis-on managed o r
on competition. The Clinton plan, for instance, smsses gov ernment
management. It incorporates a national board with sweeping powers
to set bud gets, determine benefits packages and, in some mas, fuc
treatment prices. Thus competi tion would operate wit h in a
tightly organized framework of government controls. The Jackson
Hole proposal, by contrast, is less rigid, but even this
incorporates various boards and federal rules to limit and direct
competition 15 Congnuison of Premium Trends for the Federal Emp r
Orees Health Bems Program IO Private Sector Pmum Trends and Other
Market Indicators, unpublished study conducted by Lewin/IcF,
Arlington, Virginia, 1992 16 Robert E. Moffit, PhD., Comparable Wd
for Doctors: A Sevete Case of Government Malpmctb, Heritage F o
undation Backgrounder No. 855, September 23,1991 10 Each of these
proposals, of course, exists only in theory. The interesting thing
about the Federal Employee Health Benefit Program, the only
existing national managed com petition program, is that it inc o
rporates relatively little direct management. The heart of the
FEHBP, which covers over nine million federal workers, retirees,
and dependents, is an annual choice of health plan, known as "open
season Federal workers axe presented with a set of competing plans,
with information on premiums, services, and likely out-of pocket
costs. They then pick the plan they consider the best value, with
about two-thirds of the premium cost paid directly by the
government. While the system is managed by the OMice of Per sonnel
Management, OPM's main function is to assm an orderly open season,
determine whether competing plans meet basic criteria, and remit
premiums to the relevant plans.

The FEHBP is by no means perfect, but it does offer a useful
real-life model as a ben chmark for analyzing the managed
competition component of the Clinton Plan, as well as the
Conservative Democratic Forum's managed competition
legislation.This, to gether with other analysis, suggests that
significant refcnms are needed in the proposals P r oblem #1 17
Price controls don't mix with competition Price controls introduce
huge distortions into a market. Combining them with a strong dose
of competition and consumer choice only aggravates the problem, as
pa tients and providers make choices and de c isions based in many
cases on artificial prices. And complex price controls are
unnecessary if a strong market exists. Si cantly, even though the
FEHBP includes several fee-for-service health plans, it does not
impose Medicare-style price controls on phys icians or hospitals
Solution: Abandon price controls in the Clinton plan, including for
Medicare, and allow competitive markets to control costs. Let
consumer choice of plan, or direct payment for medical services, be
the instrument of cost control.

Basing a family's choices of plan to those offered through an
employer based co-operatlve retains many of the drawbacks of
today's employment based system.

Under the Clinton plan, the place of employment still would
determine the range of RoblemX2 health plans available to a family.
Each company could calculate whether its bottom line would be
better if it continued to provide insurance, or simply dumped its
em ployees into a managed care network. This is the same dumping
incentive for employ ers that wou l d result in millions of
Americans losin their current coverage under the major "play or
pay" bills languishing in Congress. 1 17 For a full description of
the FEHBP, see Robert E. Moffit, Ph.D Consumer Choice in Heal
Learning from the Federal Employee Hea l th Benefit System Heritage
Foundation Buckgrounder, No. 878, February 6,1992 18 See Edmund F.
Haislmaiex, The Mitchell HealthAmeka Act A Bait and Switch for
American Worlrers Mtage Foundation Issue Bulletin No. 170, January
17,1992 11 I In the CDF plan, p l ace of em- ployment also
determines the I Value of Health Care Exclusion for I range of
plans available to a I Typical Families in 1991 family. Thus
although insurance reforms would mean a family could always have
access to a plan, changing jobs would in I many cases also require
a fam- less than $10,000 50 ily to change its coverage.

By contrast, almost all Mem bers of Congress and other fed eral
workers and retirees have the same range of choices in any given
area his means $1 00,000 or more 1.463 All Fa milies that moving
from a huge agency to a small congressional office, or retiring,
does not force a change Of coverage Souroo: Lewin/lCF estimates
using the Hdth Benefits Simulation Model Solution: Take an
individuals place of employment out of the equat i on by allowing
fami lies in any large geographic ma to enroll in any available
plan. Under this arrange ment, the HPPCs envisioned in the
Conservative Democratic Forum bill would operate much as OPM does
for federal workers. If large employers wished to o f fer a special
range of plans to their own employees they could do so, but workers
would not have to join a company-sponsored plan. In some cases,
very large employers cmntly operat ing a plan might decide to spin
it off as a subsidiary and turn it into an Accountable Health Plan
open to anyone in a geographic =a. Among other things, this would
mean a worker could remain enrolled in the plan if he moved to
another fum In addition, employers could be required to make
payroll deductions, on the instruc tion o f employees, and send
premiums to each workers chosen plan, as federal agen cies and
ofices do for federal workers. This would reduce total
administrative costs of the system and make premium payment simpler
for most families. For the employer it would be much like making a
payroll reduction for an employees chosen 401(k pension plan.

Problem #3: Limiting plans to standard packages reduces consumer
choice and Innovation, and will lead to intense lobbying by
specialty groups.

One concern expressed by many a dvocates of managed competition
is that if rival plans can compete directly for customers,
cherry-picking will occur. This means some plans will offer
low-cost basic services aimed at healthy individuals, or give
healthy individuals a discount to get thei r business, leaving less
healthy families in in creasingly expensive plans with ma services.
A related concern is that families 19 Some plans are restricted to
certain categories of workers 12 would sign up for a basic plan
until they want extensive electi ve treatment, and then switch
temporarily to a more elaborate plan. This adverse selection
problem exists to a degree within the FEHBP, where each plan must
charge all employees and I ees the same premium.

Most proponents of managed competition attempt to deal with this
by designing a system to force plans to compete primarily on
quality and price, not on the range of services they offer. Under
the Jackson Hole Group and CDF proposals, for instance, a national
board would establish a standard, comprehensiv e health package
that all com peting plans would be required to offer. This would be
like all automobile companies making one standard vehicle, so that
they could compete on the basis of quality and price, not by
offering models with different equipment. O n ly the standard
health pack age would be eligible for tax relief. Any additional
services would have to be paid for in after-tax dollars. The
Clinton proposal is less clear. Managed care networks would receive
a budget-driven fmd annual fee for meeting a consumers full health
needs.

The National Health Board would determine the comprehensive
package required of insurers ment board determines the standard
medical services available to all Americans cept for those willing
and able to pay in after-tax dollars for additional sdces. This
would be like requiring most Americans to drive the basic model of
Chevrolet, while allowing a choice of luxury can and imports for
the rich. Innovative treatments, 01 al ternative forms of health
caxe, would have to wait for g overnment approval as part of the
stanm package befare they would be generally available to dary
Americans.

A related problem is that every specialty would have a strong
financial incentive to lobby hard to be included in the
tax-preferred standard package . Specialty groups have lobbied
successfully at the state level to be included in state-mandated
insurance package.This has forced up the cost of health insurance
and is a major cause of firms deciding to self-insure (feded law
then pennits exemptions fro m state mandates).

With standard packages determined at the national level, the
intense lobbying simply would move from state capitols to
Washington, no doubt with the same cost-increas There are several
problems with this approach. For one thing it means that a govem
ing results.

Solution: Rather than establish a standaxd comprehensive
package, with tax relief limited to that plan, require a lean basic
package but allow families to choose a selection of ser vicesbeyond
that and still obtain some tax relie f (see below 4 This would make
the after-tax cost differential between a basic plan and an mare
elaborate plan less sharp and so reduce the incentive for medical
specialties- and organizations representing Americans with specific
diseases-to lobby hard to be included in the base package.

The FEHBP effectively operates in this way, with direct
government assistance (ap proximately two-thirds of the premium
cost, up to a maximum) taking the place of tax relief.
Significantly, the spndad requirements of FEHBP plans are minimal,
and there is little pressm on Congress to expand them. Still, the
market has evolved such that most plans do provide the services
available in good corporate-sponsored plans To be sure, some
adverse selection does take place in the FEH B P, and would do in a
national system if plans could compete on the basis of services
offered, rather than solely on price and quality. But that really
only matters if plans are not able to vary 13 premiums to some
degree according to risk. If they could v ary premiums, competi
tion would make cherry-picking less attractive by driving down the
premium price for covering healthy families, while higher-risk
families would mean good reve nues for a competitive plan in the
higher premium range.

There is a proble m with this only if premiums reflecting risk
become urnason ably expensive for families. This happens today.
Supporters of managed competi tion could reduce that problem by
permitting plans to quote premiums for new en rollees only within a
specified band (say up to 25 percent above or below a stan dard
premium, according to risk) and without the right to turn down an
applicant.

This is known as modified community rating. Existing enrollees
would always be able to renew coverage at a premium increase no gr
eater than the rise in the cost of the standard
premium-irrespective of any change in their health status Still,
requiring insurers to offer coverage to anyone, irrespective of
medical con dition at a fixed price (community rating) or even
within a band ( m odified commu nity rating) for a standard package
of benefits, as proponents of managed competi tion would do, still
leaves the insmrs open to adverse selection by families. This
problem is endemic to all farms of community rating, because it
forces insur e rs to accept high-risk individuals without fully
factoring their cost into premiums. A far better approach would be
to subsidize high-risk individuals directly, and allow in sm to
charge appropriate premiums to cover them. This can be done through
the tax treatment of health coverage (see #4 The credits and
vouchers would lleduce the effective cost of more elaborate and
expensive coverage for those families rc quiring it Problem #4:
Most managed competition proposals do not sufficiently reform the
tax trea t ment of heatth costs Todays tax treatment of health care
costs discourages sensible choices by con sumers. By limiting full
tax relief to company-sponsored health plans, the tax code
enburages gold-plated company-paid plans while penalizing any
employee w h o would pxtfer a leaner plan offered outside his
company. By providing relief only fm premiums, the code encourages
over-insurance, with employees routinely in suring themselves
against such things as $5 prescriptions and routine dental care
just to recei ve a tax break. The result is mm costly insurance
farms and little in centive for families to shop wisely for even
the most basic medical items.

The tax code is also extremely regressive in the wa y it helps
families affard care. As Chart 2 shows, the value of the health cm
tax exclusion is large for upper-income households with ccnporate
plans, minuscule for low-paid workers with plans, and non-existent
for those who work for firs without a plan. Reform of the tax
treatment of health care is needed not only to correct the
incentives in the current system, but also to assure coverage for
the uninsured without any gen eral increase in taxation.

The managed competition proposals generally do not adequ ately
address the need for tax refarm. Clinton has endorsed the idea of
limiting the degxee to which companies can deduct the cost of
health care plans. The CDF bill would do noth ing to change the tax
treatment for employees, but it would introduce a tax penalty 14
How "Managed Competition" Would Work AHPs cannot base rates on
medical history or predsting condiions Individuals Small Businesses
All AHPS must offer the sambasicbeneffts 00000 I Federal Govern
MpaYsPart of premium for those with'low Jdn coope r ative to cut
administrative costs and spread rlsk Large Businesses nn I I Buy
insurance CBrecIiyfrmAHP I I I overseeheaithmarket Provide consumer
information Adjust for risk akng AHPs Standardizeaccounting on the
quality of AHPs and paperwork Source: Cons e rvative Democratic
Forum 15 benefits, yet leave well-paid employees with large tax
breaks and all employees with the incentive to press for expensive
company-sponsored plans while resisting reason able attempts by
firms to make workers more attentive to c osts by paying more
out-of pocket for their coverage.

By contrast, the Jackson Hole Group proposal would limit the tax
relief for families to the value of the least costly standard plan.
If a company provided a more generous plan, the exrra cost would
beco me taxable income to the employee. By keeping the tax break as
a deduction, highly-paid individuals still would enjoy the largest
tax break under this arrangement, since they are in the highest tax
bracket, while low-paid workers in low brackets or below the tax
threshold still would receive little or no assis tance for the
purchase of medical cm.

Limiting tax relief to the least costly standard plan also would
mean in practice that full tax relief likely would only be
available to a managed care health ma intenance or ganization (HMO
Hence, the tax code would strongly penalize those Americans who
value choosing their own doctar.

In addition, the proposals still would limit tax relief to
insurance (or a plan not to out-of-pocket costs. So overinsurance
woul d continue to be encouraged Solution: Eliminate the current
tax exclusion for company-sponsored plans and replace it in a
budget-neutral manner) with a sliding scale refundable tax adit for
the purchase by families of insurance or out-of-pocket medical ex p
enses. Companies with health plans would have to inform employees
of the amount of their compensation devoted to the plan and permit
employees to cash out this amount if they purchased at least a
basic plan from another source This reform would do several things.
First, it would give families a strong incentive to shop for the
best value for money in health care coverage and seMces. Second, it
would end the artificial distinction between insurance and
out-of-pocket medical costs, thereby encouraging famili e s to
choose mare economical plans with higher de ductibles and
copayments. And third, it would give mcnz help to the low-paid and
sick, and less to the highly-paid and healthy reason for this is
that a refundable sliding-scale tax credit is like a voucher , with
the amount of the voucher equal to a percentage of total medical
costs. The percentage is highest for those with highest costs
compared with their income. Thus a lower-income family, or a family
generally in ill-health, would receive assistance equa l to a high
percentage of their insurance and direct medical costs.

This tax reform is the central feature of a comprehensiv
Consumer Choice Health Plan, developed by scholars at The Heritage
Foundation5 A modified version of the consumer choice model is c
ontained in the managed competition proposal advanced recently by
the Progressive Policy Instit~te 20 See Stuart M. Butler and Edmund
Haislmaier. eds A Nufiod Heulth Systemjor America (Washington, D.C
The Heritage Foundation, 1989 and Butler, op. cir 21 S e e Rosnez,
op. cit 16 CONCLUSION MOVING TOWARD COMPREHENSIVE HEALTH REFORM
While the Clinton proposal is so seriously flawed as to be
unworkable, it does at least seem to recognize that the key to
fundamental health reform in the United States is through t h e
private sector. He is not offering-at least overtly-a reform along
the lines of the Canadian system, and he has virtually abandoned
the play or pay proposals championed by the congressional
leadership. He seems to have accepted that he needs to unleash t he
power of consumer choice and competitive markets. Today these
powerful forces for efficiency and cost control either are
thwarted, or so distorted and misdirected by the tax code that they
perversely encourage inefficiency and a surge in costs si dent- e
lect Clinton, like an increasing number of lawmakers, recognizes
that competition and consumer choice are crucial. The problem is
that his proposal still is not really based on these forces. Other
proposals advanced by lawmakers and organizations friendly to the
incoming administration would do more to incorporate market
dynamics into a na tional plan, but these, too, have serious
flaws.

The modifications needed to make these consumer-choice proposals
work effectively are contained in the comprehensive pla n developed
at The Heritage Foundation. The es sential features of the plan axe
contained in S. 3348, sponsored in the Senate by Onin Hatch, the
Utah Republican.This plan would introduce tax and insurance refms
which would, in effect, open up an improved v ersion of the federal
employee health system to all Americans. It would allow them to
choose plans offered by unions, chmhes, farm bu maus, or employer
groups. They could make a choice without xegd to their place of
work. And the plans tax reform would gi ve Americans the means and
the incentive to choose wisely and economically. And in doing so,
it would provide all American fami lies with essentially the same
health system enjoyed for many years by their qresenta tives in
Congress Stuart M, Butler, PhD.

Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."

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